2020 has been a tough year for all, especially for small business owners and entrepreneurs. But during the hard times of pandemic, cash flow has helped the owners keep the fire of their business alive.
Well, the reason behind this is that with a healthy and proper cash flow, it becomes straightforward to sustain the daily operations of a business, debts can be met on time, and there is a broad scope of business expansion. Without adequate cash flow management, small business owners are most likely to face financial ruin earlier in their business journey.
Nowadays, small businesses have gone online, and they are accepting online payments as well; their owners are managing finances through different online book-keeping platforms like Square, Xero, QuickBooks, etc. Still, many young small business entrepreneurs and owners struggle to understand the concept of cash flow and the ways to manage it.
Importance of Cash Flow in Your Business
According to a report, it has been revealed that approximately 88% of small businesses are not able to manage their cash flow properly, due to which they face challenges in meeting the daily requirements of a business. In any business, cash is the king, and to keep the business growing, it is significant to maintain and manage the incoming and outgoing of the money.
Often, businesses tend to expend more than they earn within a given period of time, which causes an imbalance in the revenue structure. Mismatched income and expenditure often lead to negative cash flow as well. In the case of small-scale businesses, it takes a lot of hard work and precise management to generate the cash flow along with minimum expenses.
Possible Reasons for Negative Cash Flow
When a business is not left with sufficient money to cover the operating expenses, it becomes vital to minimize the business’s negative cash flow. There are many reasons which cause negative cash flow, such as:
- Low Profits
- Expensive Operating Costs
- Overinvesting
- Unexpected Financial Expenditure
- Past-Due Customer Payments
- Low Or High Product Pricing
Ways to Minimize and Manage Negative Cash Flow
But thankfully, there are ways by which you can minimize and manage the negative cash flow of a business. Let’s look at some effective tips that can help a small business owner or entrepreneur:
- Be Careful Of Your Spending and Investing:
In a small business, it is vital to analyze expenditures. Before putting money on new software, piece of equipment, or hiring a new employee, ensure that you review your business’s financial statements and needs. On the basis of that, prepare a list that separates the “must-haves” and “would-likes” of your business. Ensure that you always spend money on the must-haves as it will automatically manage your cash flow.
- Evaluate Your Expenses Regularly:
Reviewing business expenditure regularly is crucial to minimize the negative cash flow. To avoid a financial crunch in the business, make sure that you are recording all your business’s overhead costs. Evaluate the necessary expenditure and see whether you can have an affordable alternative for them.
- Create An Emergency Fund:
Unexpected financial expenses can blow your finances instantly. Therefore, it is vital to have a reserve that you can use to bear the costs of unexpected operating expenses. To create the fund, eliminate all the unnecessary expenses, like giving up the software you rarely use or finding an economical alternative for your utility bills.
Long and Short Term Cash Flow Strategies
To balance the account receivables, account payables, and shortfall in a small business, owners must have a sound strategy to maintain their long and short-term cash flow structure. Along with reevaluating operating expenses, selling or leasing idle equipment, here are some valuable strategies that can help all small business owners and entrepreneurs.
- Identify Risks And Be Ready In Advance:
With advanced accounting software, quick invoicing is possible, due to which it has become easier to manage the revenues of the business. But still, there are different risks and challenges involved in running a small business; therefore, it is always beneficial to assess them prior. Make a separate spreadsheet wherein details of cash inflow and outflow will be listed. When you have a proper cash flow structure, there will be no issues in meeting the business’s daily operating costs.
- Create a Separate Bank Account:
Most online small business owners make a common mistake, i.e., they mix their business bank accounts, credit cards with their personal ones. However, it is pivotal to have a separate bank account for all your business activities. Ensure to make all the business-related expenses by a separate credit card, as, at the end of the month, every bank issues the statement for the credit cards. This information can be used to manage the cash flow budget.
- Monitor Your Inventory:
It is important to monitor the regularly selling products and the items that are not working on your product list. In this way, you can manage and maintain your working capital in a very effective ad efficient manner. Make sure that your inventory levels are well-balanced in such a way that it doesn’t block the capital of your business.
- Increase Prices:
If your business’s cash flow is in a poor state, you must consider revising the prices of your products and services that you offer on your website. Ensure that you keep the prices competitive and fair so that you can easily pay out your business’s needs and make profits.
- Expand Your Market:
Include new sources of revenue in your business so that you can boost the cash inflow in your business. You can consider adding a new line of products and services, develop a new marketing plan, encourage your clients to make more purchases by offering incentives and discounts, etc.
Some Closing Thoughts:
Well, that’s all for some strategies to maintain the cash flow structure of your business. Depending upon your small-scale business’s requirements, some or all of the tips and strategies that are mentioned above can be implemented in your business.
Still need help with Cash Flow? Sometimes it is much easier to say what needs to be done versus how to make it happen.